Key Idea: Left alone, a market clears at the crossing. Sometimes a government decides the crossing is the wrong place: rents too high, farm prices too low, too much smoking, too few vaccines. It has three tools. A price control fixes the price and leaves a gap. A tax or a subsidy shifts supply and moves the crossing. Each one helps someone, costs someone, and loses a triangle of surplus. Where you meet it:
Paper 1
- Essays.
- Evaluate / Discuss [15] on floors, ceilings, taxes and subsidies: the most examined 15-markers in Unit 2.
Paper 2
- Data response.
- Define [2]: price ceiling, minimum price.
- Sketch [2] a ceiling's shortage; Explain [4] with a diagram: tax revenue, subsidy cost, a minimum wage.
Every stakeholder question
- Winners and losers.
- Consumers, producers, government, workers, society: name each and say who gains and who pays.
⛔ Price controls: a price the market cannot reach
A price ceiling is a legal maximum, set below equilibrium to keep something affordable. A price floor is a legal minimum, set above equilibrium to protect sellers or wages. Set on the wrong side of the crossing, neither does anything.
Price ceiling (maximum): Sits **below** equilibrium.. At that price buyers want more than sellers offer: a **shortage** that never closes.. Queues, rationing, a black market, and quality falls as landlords stop repairing.. Example: rent controls..
Price floor (minimum): Sits **above** equilibrium.. At that price sellers offer more than buyers want: a **surplus** that never closes.. Unsold stock the government may have to buy, or unemployed workers under a minimum wage.. Examples: farm price supports, the minimum wage..
Mark the shortage or surplus as a labelled gap between Qd and Qs at the controlled price. It stays open because the price is no longer allowed to move. Both controls trade fewer units than equilibrium, so both lose surplus: a deadweight loss.
💰 Indirect taxes: supply shifts up by the tax
An indirect tax is a tax on a good, paid to the government by the seller. It adds to the cost of every unit, so supply shifts up by the tax: buyers pay more, sellers keep less, fewer units sell, and the government collects revenue.
| On the diagram | What to draw or read |
|---|---|
| Specific tax | a fixed amount per unit: S shifts up by a parallel distance |
| Ad valorem tax | a percentage of the price: the gap between the curves widens as price rises |
| Price paid by buyers | up, to the new crossing |
| Price kept by sellers | price paid minus the tax: read it off the original S at the new quantity |
| Tax revenue | the rectangle: tax per unit × the new quantity |
| Deadweight loss | the triangle between the two quantities, under D and above S |
The seller hands over the tax, but who bears it depends on elasticity. Inelastic demand → buyers pay most: they cannot walk away, which is why cigarettes and fuel are taxed for reliable revenue. Regressive: a tax on a necessity takes a bigger share of a poor household's income. The evaluation point most answers miss.
🎁 Subsidies: supply shifts down by the subsidy
A subsidy is a payment per unit from the government to producers. Supply shifts down by the subsidy: buyers pay less, more units sell, and producers receive more per unit than buyers pay. The opposite of a tax in every direction.
| On the diagram | What to draw or read |
|---|---|
| Price paid by buyers | down, to the new crossing |
| Price received by producers | price paid plus the subsidy: read it off the original S at the new quantity |
| Cost to the government | the rectangle: subsidy per unit × the new quantity |
| Who gains | shared by elasticity: with inelastic demand the price barely falls, so producers keep most of it |
| Deadweight loss | the triangle of extra units whose cost is more than buyers value them |
Important: Every evaluation of a subsidy comes back to opportunity cost: the schools or hospitals not funded, or the taxes raised to pay for it. And a subsidy can keep inefficient firms alive that the market would have closed.
⚖️ Evaluating any intervention
Every 15-marker in this topic is the same job: say who the tool helps, who pays, what is lost, and what else the government could have done.
| Tool | Who it helps | Who pays, and what is lost |
|---|---|---|
| Price ceiling | the consumers who still get the good, at a lower price | producers; the consumers who queue and go without; a black market; deadweight loss |
| Price floor | the producers or workers who keep selling, at a higher price | consumers pay more; unsold stock or unemployed workers; taxpayers if the state buys the surplus |
| Indirect tax | the government (revenue); society, if it cuts a harmful good | buyers and sellers, split by elasticity; poorer households if the good is a necessity |
| Subsidy | consumers and producers; society, if it raises a beneficial good | taxpayers; whatever the money would have done elsewhere; inefficient firms kept alive |
Effective? Does it reach the goal. Efficient? How big is the deadweight loss. Equitable? Who gains and who loses, named. Alternatives? Compare at least one and say why it is better or worse. Stakeholder questions want the losers as well as the winners.
✍️ Worked examples
The four shapes this topic is asked in, with new scenarios. Try each before opening the plan.
A text describes a government guaranteeing farmers a minimum price for maize. Define the term price floor.
Model answer plan
See the mark-by-mark plan — for / against / judgement, with marking guidance — in study mode.
Now the tax diagram.
A government places a specific tax of 30 cents per bottle on bottled water. Using a demand and supply diagram, explain the effect on the price paid by consumers and on government revenue.
Model answer plan
See the mark-by-mark plan — for / against / judgement, with marking guidance — in study mode.
Animated graph
Watch the graph build step by step in study mode.
Now the subsidy diagram.
A city pays bus companies a subsidy for every journey they sell. Using a demand and supply diagram, explain the effect on the price of a bus ticket and on government spending.
Model answer plan
See the mark-by-mark plan — for / against / judgement, with marking guidance — in study mode.
And the Paper 1 shape.
Using real-world examples, evaluate the view that a minimum wage always harms the workers it is meant to help.
Model answer plan
See the mark-by-mark plan — for / against / judgement, with marking guidance — in study mode.
✅ Quick self-check
Tap each card to check yourself.
A price ceiling is set above the equilibrium price. What happens? Nothing. The market price is already below it. A ceiling only bites when it sits below equilibrium.
Name three things that follow a permanent shortage. Queues, rationing or a black market, and falling quality, because sellers have no reason to keep customers happy.
Demand is inelastic and a tax is imposed. Who bears most of it? Buyers. They keep buying despite the higher price, so the price rises by most of the tax. Sellers bear most when demand is elastic.
How do you show tax revenue on the diagram? A rectangle: tax per unit (the vertical gap between the two supply curves) × the quantity after the tax.
How do you show the cost of a subsidy? A rectangle: subsidy per unit × the quantity after the subsidy. The new, larger quantity, not the old one.
After a subsidy, who receives more: buyers pay P, so producers get…? P plus the subsidy. Buyers' price and producers' price are different after a subsidy. Mark both.
A minimum wage is which kind of control, and what does it create? A price floor in the labour market. Set above the equilibrium wage, it creates a surplus of labour: unemployment, shown as the gap between quantity supplied and quantity demanded.
What does regressive mean, and which tool is it aimed at? A tax that takes a bigger share of a poor household's income than a rich one's. Any indirect tax on a necessity, such as food or energy.
Exam tips
- A ceiling goes below equilibrium, a floor above. Drawn the wrong way round, the diagram answers a different question.
- Mark the shortage or surplus as a labelled gap between Qd and Qs at the controlled price. That gap is the answer.
- Tax: supply shifts up by the tax. Subsidy: down by the subsidy. The vertical gap between the curves is the amount per unit.
- Revenue and cost rectangles use the quantity after the change.
- After a tax or a subsidy, buyers' price and sellers' price are different. Label both.
- Incidence follows elasticity: the inelastic side bears more. Say it and show it.
- In a 15-marker: effective, efficient, equitable, alternatives. Name the losers as well as the winners, with a real example.